Jam tomorrow, not today, in the Chancellor’s Spring Statement

The first “Spring Statement” since the Budget was moved to the Autumn last year was a pretty dull affair. The Office for Budget Responsibility did not give the Chancellor much to work with. Economic growth was revised up very slightly this year, but the medium-term outlook is very subdued. UK economic growth is forecast to be 1.6 percent or below for the next five years. This compares with a long-run economic growth rate of just over 2 percent going back to the early 19th century.

Weak growth is partly a reflection of a lack of job creation. Employment is forecast to rise by half a million over the next four years. But before the Brexit vote, UK employment growth was much stronger than this. Indeed, in the four years 2013-2016, employment in the UK grew on average by 500,000 in each year.

Slower growth partly reflects the impact of Brexit in the short-term. But it is also due to the pessimistic view taken by the OBR about productivity growth and constraints on the growth of the labour supply. The UK has already taken up most of the labour market slack created by the Global Financial Crisis – and the economy is close to “full employment”. Meanwhile, immigration is likely to be slower in the years ahead as a new system is put in place to control inward migration from the European Union.

However, it is quite likely that the OBR is overdoing the gloom. After a couple of years of growth around 1.5 percent in 2018 and 2019, the latest PwC forecasts suggest that UK GDP will rise by 1.8 percent a year from 2020 onwards, stronger than the Spring Statement forecast. If our view of the outlook for the economy is correct, we should see stronger tax receipts than the Chancellor’s Spring Statement suggests. That would give the Chancellor more room for manoeuvre in future Budgets.

It probably suits the Chancellor to be downbeat at this stage of the electoral cycle. Much better to be able to deliver positive surprises in subsequent Budgets as we move towards the next Election. So there is a promise of jam tomorrow, but not today. However, that is still conditional on how the UK economy performs as we move through the Brexit process over the next few years.